US Rates – A pop in short-term credit supply

The asset-backed commercial paper (ABCP) market has experienced significant expansion, with outstandings climbing to $585 billion—a nearly 20% year-over-year increase. Short-duration strategists Molly Herckis and P.J. Vohra observe that this growth is primarily fueled by dealers utilizing ABCP as an alternative financing channel for fixed income and equity collateral. Independent sponsor programs now represent 42% of the market, gaining share over traditional bank-sponsored multi-seller programs due to their off-balance sheet benefits and efficiency in intermediating transactions like total return swaps and securities lending. While equity financing costs have moderated since June, they remain historically elevated, sustaining demand for these structures. Simultaneously, the non-financial commercial paper market has surged by $125 billion year-to-date as issuers shore up liquidity following geopolitical conflicts. Despite heavy supply, broad investor demand from money market funds and corporate entities has kept spreads stable, though potential hawkish shifts in Federal Reserve policy remain a primary risk to current yield curves.